Split Thread Trickle-down economics

[Stacko]

Please explain the reasoning behind this statement.

Remember the trickle down effect the Regan tax cuts had?

Well, it didn't happen after the 1986 Tax Reform Act. Wages fell in the months and years after President Ronald Reagan signed the bipartisan legislation in October 1986, which slashed the corporate tax rate from 46 to 34 percent.

Average weekly wages for rank-and-file workers (non-supervisors) went from $285 a week in the autumn of 1986 to $282 a week in October 1987, according to Labor Department statistics that are adjusted for inflation. And they kept dropping. Average weekly wages hit $271 a week by 1990.

There aren't any other time frames to check because the United States hasn't done any big overhauls to corporate tax rates since 1986.

Wait that looks like a trickle up.

 

[Cl1mh4224rd]

Also, I'm not sure it works in practice.

I don't think there's anything to be unsure about. The theory itself had been put into practice, yet the alleged benefits are still theoretical to this day.

And I don't think I've seen an advocate point to a practical implementation of the theory that has resulted in the advertised benefits.

 

[Skeptic Ginger]

Isn't there a third option? They will pay off existing debt. Which does not have a stimulative effect.

The people the debt is paid off to then have that money to spend.

If people are left with more discretionary income, they will tend to either spend or invest it. Both cases have stimulative effects on the economy...

Depends on what they invest in, doesn't it?

Buying stocks drives up stock prices, and a lot of that kind of equity is on paper only. That money is not going into the businesses the way the IPO does. So when a rich person gets more wealth, that wealth often simply sits idle, parked in stocks or real estate.

 

[Trebuchet]

Remember the trickle down effect the Regan tax cuts had?



Wait that looks like a trickle up.

Which is the entire hidden objective of Republican tax cuts.

 

[McHrozni]

Okay, but 2/3rds of the jobs are small business so aren't you only talking about 1/3rd of the jobs? Also, I'm not sure it works in practice. Often the tax abatement for companies to build large stores or factories is so high that the local economy ends up breaking even at best and is sometimes worse off. For example, when Ken Ham built the Ark building, he suggested that the local economy would be booming. That hasn't happened.

Truth to be told a system which can reap benefits of a trickle-down system will have few small businesses to begin with. The trickle-down economics will help get them started, increasing inequality will be the price for increased wealth generation.

China has brought foreign money into the country because of its fanatical export, growth model. That model is now failing.

Yes. I did say several times that like all other economic models, this one too only works until the conditions are right.

McHrozni

 

[McHrozni]

The issue I have with the idea is that since it's not a reliable source of income, large business owners are not likely to invest that but rather to stash it somewhere or pocket it.

That's a common postulate by ardent Marxsists and schoolboys who first think of business and injustice in the world, yes. It's false, you don't become rich by stashing your earnings somewhere or pocketing them. If you're wealthy it is normal for you to invest your money somewhere.

So my question is essentially: do you have any evidence that it works?

Yes: rich people exist.

If everybody just pocketed or stashed their extra earnings there would be no rich people. There would be poor, middle class and well-off people, but no one would ever become rich.

McHrozni

 

[McHrozni]

I tend to agree - IMO trickle-down isn't cut and dried.

Depending on the tax laws, lower taxes (personal and/or corporate) can even act as a disincentive to invest in business. If I can pull money out of a business without having to pay very much tax then I may do so. OTOH if investment is tax efficient then I may be more inclined to invest - especially if I don't need the money right now.

Trickle-down economic does not equal lower taxes across the board. It means low(er) taxes for high earners and greater tax incentives to invest. Of course other tax cuts will also be sold to the voters under the guise of trickle-down economics but that's a deception.

McHrozni

 

[McHrozni]

I disagree, the US is sufficiently robust to withstand 8 years of President Trump, especially as he is mostly empty rhetoric.

Assuming the US exists in a vacuum, which it doesn't. There are almost 200 other countries with their own problems who also love to cause problems for the US, whether due to political reasons or just because it's in their nature to do so. There is a high chance for a major refugee crisis in Venezuela under his watch, there may well be a major crisis in China, Korea could flare up during the next three years, Russia could well make another brazen move, Saudi Arabia may run out of money and so on.

US is sufficiently robust to withstand 8 years of President Trump, assuming no major external factor takes place. I expect at least two of the above five examples to take place in the next 7 years.

McHrozni

 

[Trebuchet]

US is sufficiently robust to withstand 8 years of President Trump, assuming no major external factor takes place. I expect at least two of the above five examples to take place in the next 7 years.

McHrozni

Surviving is much different from prospering. The US survived eight years of GW Bush, but emerged in much worse shape than it started.

 

[lomiller]

How does it work exactly?

It doesn't. Any form of fiscal stimulus, including “trickle down”, is a pointless debt creating endeavor except in conditions where real interest rates drop to near zero.

The Fed already uses monetary policy to create as much growth as possible without creating undue inflation. Any fiscal stimulus on top of this creates more inflation than the Fed is comfortable with, and they respond to it by restricting the money supply cutting growth along with it. You get no real growth and are left with only the debt to show for the exercise.

The exception noted above is that when real interest rates drop to near zero the Feds ability to create economic growth is greatly reduced.

 

[Belz...]

That's a common postulate by ardent Marxsists and schoolboys who first think of business and injustice in the world, yes.

Nice poisoning of the well. The argument has nothing to do with ideology.

It's false, you don't become rich by stashing your earnings somewhere or pocketing them.

Who said anything about becoming rich? They're already rich.

Yes: rich people exist.

They didn't become rich via trickle-down economics.

I know you're not stupid, so playing as if you don't understand the post is beneath you.

 

[lomiller]

Isn't there a third option? They will pay off existing debt. Which does not have a stimulative effect.

Even paying off existing debt creates economic activity because it leaves banks with excess cash (relative to what they can lend out based on their reserves). Instead of having this sit idle and earn nothing they seek to lend it out at lower rates driving interest rates down. This in turn makes borrowing money for either investment or consumption more attractive.

 

[lomiller]

Wait! A lack of investment was caused by a lack of consumer spending. Companies don't invest in new capacity unless there is evidence of unmet demand which, in other words, is consumer spending. The two are so tightly coupled that I question if your attempted distinction is valid.

Most recessions are led by business cutbacks due to overcapacity not drops in consumer spending. Cuts in investment and excess capacity cause a rise in unemployment which in turn causes consumers to become more cautious. The Fed can deal with the latter by increasing the money supply which brings down interest rates and drives up demand, but the recession itself doesn’t end until the excess capacity is worked though on the business side, at which point people begin investing again.

The 2001 recession was driven by a huge Internet and IT related overinvestment. In most recessions there would have been some consumer spending slowdown in response, but 2001 was a mild recession and consumer spending did indeed remain strong the whole time. It was just about the worst possible use case for stimulus in the form of tax breaks. Worse, most of the 2001 tax breaks went into housing where they may have been contributing factor to the housing bubble that created much worse 2008 recession.

 

[lomiller]

Trickle-down economic does not equal lower taxes across the board. It means low(er) taxes for high earners and greater tax incentives to invest.

What are they going to do other than invest, burry their money it in their back yard? Unless you are in a deflationary economy, investing is always better than not investing. The other alternative they have is spending, which creates demand which in turn increases the return available from investing.

 

[lupus_in_fabula]

It doesn't. Any form of fiscal stimulus, including “trickle down”, is a pointless debt creating endeavor except in conditions where real interest rates drop to near zero.

The Fed already uses monetary policy to create as much growth as possible without creating undue inflation. Any fiscal stimulus on top of this creates more inflation than the Fed is comfortable with, and they respond to it by restricting the money supply cutting growth along with it. You get no real growth and are left with only the debt to show for the exercise.

The exception noted above is that when real interest rates drop to near zero the Feds ability to create economic growth is greatly reduced.

No.

Empirically we find fiscal multipliers to be above one (often way above one) during downturns, even though the interest rate isn't near the zero lower bound. So it's not true that fiscal stimulus is pointless unless rates are near zero… although, when rates are near zero, the fiscal multipliers generally tend to be even higher than during "normal" downturns.

See, for example, Qazizada & Stockhammer 2014.

 

[McHrozni]

What are they going to do other than invest, burry their money it in their back yard? Unless you are in a deflationary economy, investing is always better than not investing. The other alternative they have is spending, which creates demand which in turn increases the return available from investing.

Yes. That is why trickle-down economics can work. It creates greater returns on investment, thus rewarding those that invest and gives them ability to invest more. Part of it is incentive and part of it is the ability to invest at all.

It only works in a somewhat specific set of circumstances not present in most of the countries in the world at this time, except maybe for places like Norway or Slovenia with their unusually low GINI. I don't know enough about them to say with a great deal of certainty. You need high levels of income equality and low levels of investment at the same time to be able to benefit from trickle-down economics.

Of course in a country with low levels of income equality and high levels of investment trickle-down economics is worse than useless. That's like a country with high levels of income equality - where almost everybody is poor - and next to no invsetment coming up with new social spending to bring the country out of poverty (e.g. Venezuela). That's essentially an invitation for IMF. However social spending (investment?) can help a country that has high income inequality and a well to do economy, like USA or UK at this time.

Just because a policy is bad for one set of circumstances it doesn't mean it's bad in all sets of circumstances. Primitive Marxism is great if you ever find yourself shipwrecked alongside a small gruop of other survivors on a remote island. That doesn't mean it's suitable to run a modern country. Running a modern capitalist system in that situation will probably result in your demise, but that doesn't mean a modern capitalist system is a bad way to run a modern country. The same principle applies to trickle-down economics.

McHrozni

 

[lomiller]

No.

Empirically we find fiscal multipliers to be above one (often way above one) during downturns, even though the interest rate isn't near the zero lower bound. So it's not true that fiscal stimulus is pointless unless rates are near zero… although, when rates are near zero, the fiscal multipliers generally tend to be even higher than during "normal" downturns.

See, for example, Qazizada & Stockhammer 2014.

I never suggested that fiscal stimulus can’t work it just doesn’t do anything monetary policy isn’t already doing. It makes more sense to use the better tool, which in the vast majority of cases is monetary policy.

 

[lomiller]

Yes. That is why trickle-down economics can work. It creates greater returns on investment, thus rewarding those that invest and gives them ability to invest more.

More investment > more inflation > higher interest rates > less investment. The cycle is controlled elsewhere. The only purpose it serves is to redistribute wealth from the middle class to the wealthy.

Part of it is incentive and part of it is the ability to invest at all.

This falls under “not even wrong”.
The incentive to invest comes from receiving a greater rate of return than not investing.
The ability to invest comes from having money in the economy that can be used for investment, which is ultimately controlled by the Fed.
Most investment money is borrowed so availability is a function of interest rates.
You don’t always want more investment, and it leads to bubbles, overcapacity and recessions. This is something the Fed considers when it targets a specific interest rate.
More investment without more consumption is undesirable, because there will be no market for the resulting goods/services.
It’s not just the wealthy that invest. Residential real-estate, retirement plans education plans and straight up equities/bond investments from the middle class are a huge part of US investments.

 

[The Great Zaganza]

In "Capital in the Twenty First Century", Thomas Piketty showed that invested capital will reliably grow faster than any other kind of capital: investment leads to more profit, which will be invested again, leading to more profit, etc.: the power of compounding.
So regardless of whether Trickle-down can provide economic boost, it will lead to net wealth transfer upwards.

 

[lupus_in_fabula]

I never suggested that fiscal stimulus can’t work it just doesn’t do anything monetary policy isn’t already doing. It makes more sense to use the better tool, which in the vast majority of cases is monetary policy.

I don't buy into the notion that monetary policy is generally a superior tool. Why would you think that? They are different tools, and so are their (direct and indirect) effects on the economy.